Interest Rate Forecasts

Recent data releases give the green light to a September interest-rate cut from the US Federal Reserve, in my view, and the latest job market report was the likely clincher. While inflation is not yet back to target, it remains within striking range, and the Fed is likely to take comfort from signs of cooling of wage growth.   As could be expected at such a meaningful turning point, a number of investors and analysts are rushing to anticipate a sharp policy correction. However, I don’t think these predictions are justified by the current economic outlook. The unemployment rate continues to point to a rather healthy labor market, consumer spending is holding up well, and fiscal policy remains exceptionally loose and seems unlikely to tighten any time soon.   I therefore remain of the view that we will see a gradual easing of policy with rate cuts totaling somewhere around 125-150 basis points, leaving the fed funds rate at or above 4%. Over the longer term, I see real short-term rates closer to their long-term 2% average than the near-zero level of the recent past. #fixedincome #investmentstrategy #interestrates #fed #inflation #monetarypolicy

The most important news coming out of the Fed tomorrow won't be the decision to lower short-term rates - everyone is already expecting that. The bigger news will be the release of the new Fed dot plot. Four times a year, the Fed publishes its Summary of Economic Projections, which includes an anonymous chart showing where each of the 19 FOMC participants believes the federal funds rate will be at the end of the year, the next few years, and over the longer run. The chart below compares the June dot plot with the current 1-month Term SOFR curve, highlighting the gap between what the Fed projected in June and what the market is pricing today. For example, the Fed's median estimate for the end of 2026 was 3.625%, while the market is now projecting 2.89%. Tomorrow’s dot plot will reveal how many rate cuts Fed officials anticipate, which will directly influence SOFR, Treasury yields, and broader markets.

All eyes are on the Fed's meeting later this month, but that’s not the most important date for rates. The event that will actually shape mortgage rates for the fall market happens this Friday, September 5th. The monthly jobs report is the most influential data guiding the Fed's decision. As Redfin's Chief Economist, here’s what I'm watching for and what it means for rates: ➡️ Neutral Report (60% likelihood): Rates likely hold steady ~6.5%. 📉 Weak Report (20% likelihood): Potential for rates to dip into the low 6s. 📈 Strong Report (20% likelihood): Rates could push toward 6.8%. For buyers, sellers, and refinancing homeowners waiting for a signal, this Friday is it.

JAY POWELL, JOBS AND THE EXPRESS LANE TO A NEUTRAL INTEREST RATE In my latest piece for StoneX Group Inc. with market strategist Kathryn Rooney Vera, I explain why I think the Federal Reserve will move its benchmark interest rate down at a faster pace than planned a few weeks ago. The labor market is paramount, as Fed Chairman Jerome Powell made clear in his Jackson Hole speech last week. I say in the StoneX Group Inc. piece: "The Fed’s goal over the next couple of years is to get the target interest rate back down to something closer to neutral. As Powell has observed, the neutral interest rate is not a fixed or known number, it can only be theorized. Many Fed officials believe it is below 3%, in part based on the recent history of low rates in the post-2008 era. We at StoneX believe it is higher. Whether you think it is 2.9% or 3.5%, almost everyone agrees a neutral rate is much lower than the present rate of 5.33%. That’s what Powell means when he says he has ample room to respond. The Fed is heading toward 3.0% to 3.5% between now and 2026, about two percentage points of cuts. "The big question is how fast it will get there. Powell has now clearly stated the pace of rate cuts will depend importantly on whether the job market cools further. (If inflation re-accelerates, or decelerates faster than expected, that will obviously also dictate the cadence of rate changes.) If the jobless rate rises further, the Fed will move to get to neutral in a hurry. If recession alarms go off – which they haven’t done yet – the Fed might even aim to move below its estimate of a neutral rate, into the 2% range. "At midyear in their Summary of Economic Projections, Fed officials estimated they would get to a neutral rate in 2026. We believe they are now on a path to get there during the second half of 2025 and possibly sooner. The Fed’s updated projections in September will likely indicate as much."

We’ve updated our #rate forecasts post-election, based on three main assumptions: 1) The #Fed will continue cutting rates, but may proceed more cautiously and maintain some optionality along the way; 2) The economy will continue to grow around trend near term; 3) A Republican sweep raises the prospects of fiscal expansion, which increases growth and inflation expectations. We still believe the direction of travel for interest rates is lower as any policy changes will likely take time to be finalized and implemented, the labor market continues to loosen, and the terminal rate has already repriced higher. But we now see the 10-year US Treasury yield trending towards 4% by June 2025, up from our previous forecast of 3.5%. Read more below.

The MPC took another step towards rate cuts today with two members voting for a rate cut. What’s more, the minutes included new guidance that “the risks from inflation persistence were receding” and a lower inflation forecast. This lays the groundwork for the first rate cut to come in the summer. We think June is most likely but it wouldn't take much to push it back to August. We then think will be followed by two more cuts leaving interest rates at 4.5% by the end of the year and at least 4 cuts in 2025. As expected the MPC left bank rate unchanged at 5.2% today. But this was a dovish hold for three reasons. First, Deputy Governor Dave Ramsden joined Swati Dhingra in seeking a reduction in rates making it 7-2. (Ramsden has tended to be a bit ahead of the pack when it comes to changes in direction). Second, the committee added guidance that it will watch the “forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.” We interpret this to mean that as long as there are no big upside surprises in the next few data releases, a rate cut will come sooner rather than later. Third, the Bank significantly reduced its inflation forecast. If interest rates follow the path that financial markets are now pricing in, inflation would be just 1.6% by the end of 2026 compared to a forecast of 2% made in March. This is a clear message to financial markets that they have gone too far in reigning in expectations for rate cuts. The upshot is that the Bank is clearly on its way to rate cuts, we think the change in guidance and forecasts are laying the groundwork for the first rate cut to come in summer, probably June but maybe August, it will depend on how the next two inflation and jobs reports turn out. At the very least, every meeting from now on should be considered live. #RSMUK #RealEconomy #MPC #InterestRates

Where will Australian interest rates settle? Here are some key points: - Australia has been a relative laggard in the rate cutting process, compared to our global peers, because core inflation took longer to decline in Australia through 2024. - But, interest rates are likely to fall further this year and the growth threat from tariffs increases the need for rate cuts. We expect the cash rate to decline to 3.6% by the end of this year and to end the cutting cycle at 3.1%. This is higher than average interest rates in the decade prior to Covid. - But the large falls in global sharemarkets from US tariffs and the potential hit to global growth means that larger and faster rate cuts could occur in coming months and a 50 basis point rate cut can’t be ruled out at the May meeting.

Fed Cuts & Mortgage Rate Forecast for 2025 Question: Do you think mortgage rates will go down in 2025, around how much, and why? Answer: Yes, I expect 30-year conventional mortgage rates to go down to between 5.75% - 6.00% in 2025. With the July jobs report coming out at 4.3% unemployment, triggering the Sahm rule, I think a recession in 2025 is likely. We are not there yet, but unemployment will continue to rise, and few are discussing the gray rhino of commercial real estate losses, which is expected to peak in 2026. (For more on commercial real estate losses, follow Dave Wald, JAKE SHARP, and Michele Wucker). However, the 10-year Treasury rate + 2.25% is likely a solid base, and I do not expect rates to decline below 5.5% in 2025. Powell’s archenemy has been inflation, but he will have to cut the Fed funds rates. How many cuts and for how much? I’d be conservative, as inflation may creep upward next year. I’d estimate 1.25% – 1.5% by the end of 2025, which would leave the Fed funds rate between 3.75%-4.00% by the end of 2025. Andrea Lisi, CFA agrees with 3.75% - 4.00% if we can steer clear of a recession. https://lnkd.in/eYeapJKY This seems reasonable as the Fed’s dot plot from July shows that half of them think about 4.00-4.25%. https://lnkd.in/gWtmiMuf Haven’t we learned by now to stop fighting the Fed, and that Powell doesn’t like to cut? To me, this seems in line with a mild recession. The 10-year Treasury note was 3.84% this morning. As you can see, when the 10-yr minus the federal funds rate is negative and comes back up to 0, there is generally a recession. https://lnkd.in/etE5VNk9 As for mortgage rates? I did some analysis on this in October 2023, and I’m still satisfied with my findings. https://lnkd.in/gDzubx9U The average spread between the 10-yr Treasury rate and the average mortgage rate is known to be about 170-175 bps. However, the Fed not buying Treasuries still increases the spread by 50 bps. So 225 – 250 bps. (3.75% - 4.00%) + (2.25% - 2.5%) = 6.00% – 6.50% But I know what you’re thinking… That’s close where we are now. Surely rates are going to go down, right? So… what if there is no recession, or what if the 10-yr stays at least 50-75 bps less than the Fed funds rate. In that case… (3.25% – 3.5%) + 2.25% = 5.5% - 5.75% All things considered, I can see mortgage rates on conventional mortgages getting in the mid to high 5s in 2025, but not lower. Say 5.75% - 6% by late 2025.

Curb Your Enthusiasm Given stronger than expected US growth momentum and ongoing march lower in inflation, we have made a substantial adjustment to our forecast for Fed cuts and interest rates. We still expect the first rate cut in May 2024 and look for the cutting cycle to end at 3% in 2025, bringing rates close to "neutral". We now look for just 5 cuts (for a total of 125bp) in 2024. Cuts are set to continue in 2025, but at a slower pace, with the Fed likely to spread out the last several cuts of the cycle. Despite growth remaining solid, inflation will help determine the starting point for cuts. We look for inflation to decline throughout the year, with core PCE finishing 2024 at 2.3% y/y. The Fed's reaction function remains uncertain, but they desperately want to deliver a soft landing, which will entail lowering rates so as not to overtighten as inflation falls. Given these changes, we now expect 10y rates to finish 2024 around 3.45% and continue to expect the curve to steepen further.   Full note for clients: https://lnkd.in/eNVdTRgD #federalreserve #economy #interestrates #inflation #cpi #growth #pce #cuts #tdsecurities #tdstrategy

Yesterday I posted my 2026 Federal Reserve rate forecast / estimate, testing the confluence of econometrics, simulation and agentic inference. Today, Yahoo Finance included my perspective in their coverage of the Fed’s upcoming policy path. In the article, I note that after expected rate cut in December, the data currently supports one to two additional cuts in 2026, contingent on labor-market cooling and inflation trajectory. "Amir Bagherpour, global managing director for Accenture, is predicting the Fed will cut rates one- or two more-times next year after cutting this week. That outlook assumes inflation as measured by core PCE will range from 2.5%-2.7% next year; GDP will be in the range of 1.5-1.8%; the unemployment rate will end next year in the range of 4.4-4.6%; and monthly jobs growth will average 75,000-125,000." For those following this, here is the piece: As part of on-going push to improve applied forecasting approaches and simulations, I will continue updating as new data, institutional signals, and market probabilities evolve. https://lnkd.in/ef7qRbU9